The Bank of Canada raised its overnight rate by 25 basis points to 2.5% on October 28, 2026, marking its first increase since 2023. The decision was widely anticipated following multiple communications over the past two months, as the central bank sought to address rising energy prices and their potential impact on consumer inflation.
However, the rate hike was not solely driven by energy concerns. The Bank of Canada also emphasized stronger economic growth and an improved outlook for 2027, despite ongoing international trade uncertainties. This suggests the central bank is increasingly attentive to both supply- and demand-side factors that could elevate inflation next year.
While the Bank acknowledged existing slack in the labor market and core inflation near 2%, it framed the rate hike as a precautionary measure. The decision reflected a judgment that the risks of future inflation had risen more significantly than the downside risks to economic growth. In essence, the move was described as 'preventative treatment.'
Looking ahead, the Bank of Canada remained noncommittal about future rate increases, stating that further moves would depend on evolving economic and inflation data. RBC economists expect gradual improvements in the economy could justify up to 100 basis points of total rate hikes, with another increase likely at one of the next two meetings. The central bank's revised GDP growth projection for 2027 stands at 2.0%, slightly above RBC's own forecast of 1.6%.
Despite the rate hike, RBC maintains that the broader economy is resilient enough to absorb modest rate increases. The expected interest rate hikes had already been priced into term government bond yields, and fiscal policy is providing additional support. Highly interest-rate-sensitive sectors like housing may feel more immediate impacts, but the overall economic growth backdrop is expected to remain stable.